The Yellow Fever

Work like you don’t need money, love like you’ve never been hurt, and dance like no one’s watching

— Unknown Author

Since gold bashing is in style this morning I thought this would be a good time to take a look at what’s going on. It seems like we see a chart like this almost every morning:

and in fact we do see a chart like this almost every morning! Yesterday we saw signs of this morning’s push when they repeatedly sold silver in an effort to push gold lower. It failed yesterday, but it finally succeeded this morning.

This morning’s low in the June gold futures contract is 1,579.60 and that is well below last week’s low of 1,590.40. What’s more today’s low is below the good Fibonacci support at 1,585.20 so we once again have some technical damage to deal with. With respect to the short term, take a look at the daily chart for spot gold:

If you work from the February 21st closing low of 1,576.60 to the March 21st closing high of 1,614.00, you’ll see that today’s decline retraced a little more than 61.8% (so far). All in all, not a good picture.

If we take a little longer-term look at gold the picture is a bit brighter as you can see here:

Although gold has been declining since September 2012 we were seeing a move higher with what appeared to be consolidation above the 1,596.20 level. Of course that changed this morning but we still have two higher closing lows in place: one from June 28th at 1,553.10 and then the 1,564.10 on February 20th of this year. These two higher lows follow the 1,541.40 closing low of May 15, 2012. It is important that these lows hold and I drew a line in at 1,562.00 to represent the lows.

While the short run may be murky, the long run remains quite bullish. The demand for gold remains strong as central banks continue buying gold. They added 534.6 tons of gold to their reserves last year and that is the most since 1964. According to the World Gold Council, official holdings increased to more than $12 trillion in 2012, and that is up from $2 trillion in 2000. India has been a big buyer as their January gold imports jumped 23% from a year ago. China is launching its first ETF backed by gold, and its new Shanghai gold exchange has become a full on exchange. China’s been a major gold producer over the last four years and it’s also been importing more gold, so much that it’s surpassing India. Also, as I have mentioned in previous reports Russia is a big buyer of the yellow metal.

Technically there is nothing wrong with gold and the trend is firmly intact and headed higher.Manipulation is evident and daily, but the end result will be the same: we can expect much higher gold prices over the next couple of years. The real problem is a bad case of unreal expectations. Bearishness is at a multi-decade high and one would assume that prices have fallen by 40% or more.Yet the truth is that after rising 660% since 2001, it has fallen less than 20% from the highs:

It hit an all-time high more than one year ago and then quickly fell to its low in May 2012. That low was tested in the summer of 2012, and it was tested again a couple of weeks ago I mentioned above.These original lows are key today for both gold and silver and they need to be watched closely… $1524 in gold and $26 in silver. If gold and silver can weather the current storm by staying above these levels, those few investors left will come out big winners.

In conclusion, it’s always good to understand what the downside risk is. If the spot gold price were to fall below $1524 support, we would see sharper downward movements before the lows are seen. If this happens we would at the very least see the $1450 level tested, but I see the possibility of much lower lows. Possibly all the way down to $1,075 in a worst-case scenario. Personally I don’t see any chance of that but I still need to be aware of the risks. I believe that gold will hold above the latest lower high and physical buying will trump the forced selling in the paper market.